Instapundit quotes an e-mail suggesting that last week’s stock market plunge may have been due to a saner impulse than rumor, fear and the madness of crowds:
The thumbnail future market history of this month is likely to include the phrase “correctly discounting the economic fallout of an Obama presidency and hard-left Congress repeating the failed frenetic economic policies of the 1930s”.
Stock prices reflect the investing public’s average current impression of what the economy will look like over an indefinite future span of time. For the past quarter century, both the Dow and U.S. economic conditions have tended upward. There have been interruptions – several bear markets, a couple of recessions, short periods during which foreign economies looked more buoyant – but the general picture has been one of a dynamic, prosperous America, with vigorous growth, low unemployment and a rising tide of private wealth. The rest of the world has been pulled upward in our train.
Coincident with – and, except in the eyes of the most intransigent socialists, not unrelated to – this economic fluorescence have been a number of tendencies and trends. Relative to pre-Reagan policies and those of the rest of the world, the United States has been notable for –
relatively low taxes and government spending (not always at the same time, but almost always at least one or the other);
relatively modest levels of government regulation and management of the economy;
a widening “investor class”, now reaching down into income brackets that once possessed almost no capital;
openness toward the movement of goods and services across our borders;
restrained money supply growth;
declining labor union membership and influence;
a robust foreign policy that has kept our country’s inevitable enemies on the defensive and minimized the damage that they could inflict on our and our friends’ interests; and
high levels of technological innovation, which have sharply increased productivity.
Anyone who thinks back to the 1970’s can’t help but be struck by the contrast. When Ronald Reagan took office, marginal tax rates were at about twice their present levels, the government dictated gasoline prices (and had recently tried fixing prices for the entire economy), banks could not operate across state lines, interstate freight rates required government approval, trade barriers “protected” almost every industry that faced substantial foreign competition, no one had an IRA or a 401(k) plan, welfare rolls were expanding steadily, a quarter of the non-government work force belonged to labor unions, federal deficits were routinely monetized, “realistic” statesmen conceded that the Soviet Union was a permanent fact of life with which we would have to reach a modus vivendi on more or less equal terms, and so on. The result had been a decade and a half of what came to be called “stagflation”. The plateau was not level, but its character is adequately demonstrated by the fact that inflation and unemployment rates in the six or seven percent range were widely accepted as the best we could hope for.
The Reagan Administration fostered dramatic policy turnarounds, and sustained prosperity followed. (Technological advances may have been a happy coincidence, though I don’t think it is daring to think otherwise. Barack Obama professes to believe that computers were invented by “government scientists”, but it was the dynamism of private enterprise that transformed them into a ubiquitous part of our lives.)
At every turn, this vision of “change” met stout, reactionary opposition. Dreams from My Father tells of young Barry Obama’s role in trying to muster resistance while “Reagan and his minions were carrying on their dirty deeds”. The leaders of that opposition,
Nor has anti-Reaganism faded into a sentimental nostalgia on the order of Jacobitism or waving the Confederate flag. At least, a rational investor, observing Senator Obama’s promise to raise taxes on “the rich”, his ambivalent (at best) attitude toward trade liberalization, his embrace of the corrupt remnant of labor unionism (including not only the abolition of secret ballots in organizing elections but also a promise to end monitoring of the International Brotherhood of Teamsters), his extravagant proposals for new spending and entitlements, his tendency to blame deregulation for all of the economy’s imperfections, and his insouciance about foreign threats, can readily conclude that the 1970’s are on their way back. The corollary is that enterprises won’t do as well as seemed likely a year ago. The Panic of 2008 presents an opportunity to find a new level more in line with probable tomorrows.
Aggravating pessimism is a new element unknown to the Johnson-Nixon-Ford-Carter era. The consensus of bien-pensant opinion is that the economy must be intentionally constrained in order to prevent “climate change”. Not many will say directly that poverty is their preferred prophylactic for carbon emissions. There is, however, no other way to describe a policy of imposing taxes or arbitrary ceilings on the use of the most efficient forms of energy. Whether or not that policy is justified by its impact on climatic conditions, it unquestionably will make all of us poorer than we would otherwise be, and the present value of stocks must be lower as a consequence.
The total picture that investors see, then, is a blend of old pro-stagnation approaches and a new imperative to make energy a scarcer resource. Perhaps strokes of good luck will falsify such fears. We might discover a way to harness fusion power cheaply, or a miracle drug might make the work force universally healthy and energetic, or miracle foodstuffs might simultaneously eliminate malnutrition and obesity, or a computer algorithm might solve the problem of economic calculation and render free enterprise obsolete, or compassionate extraterrestrials might make Earth the beneficiary of a gigantic foreign aid program. The gloomy investors pushing the Dow downward may be proven as wrong as the old-time Malthusians. That is not, alas, the way to bet.
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